mental maps

How can managers survive and thrive in unpredictable markets? To shed light on this question, I and my co-author Martin Escobari, who is now a managing director of Advent International in Brazil, analyzed ten Brazilian companies that managed to survive and thrive amidst the turmoil of the Brazilian market during the 1990’s. In several cases these companies emerged as world-class competitors in global industries including aerospace, brewing and banking.

We published our findings in the book Success Against the Odds. My posts through the rest of the summer will draw on our research and this book to bring to light some of the impressive success stories and the broader principles they illustrate about thriving in turbulent markets.

These firms’ success is an impressive accomplishment, because Brazil is one of the most unpredictable markets in the world. Brazilian managers during the 1990’s faced volatile exchange rates, sporadic availability of capital, inconsistent industrial policy, unpredictable rates of inflation and interest, and sharply increased levels of foreign competition, in addition to the competitive threats, shifting consumer preferences, and potential technological disruptions common to every country.

An elite group of Brazilian companies not only survived this turmoil, but actually emerged stronger at the end of the last decade. They responded quickly and effectively to shocks that threatened their very survival and

Anomalies, as I argued in an earlier post, are gaps between reality and the mental maps we use to guide actions. Incongruities often point to opportunities to create economic value.

5. This could work in our industry (but we don’t do it). In 1976, Dr. Govindappa Venkataswamy retired at the age of 58 as a practicing ophthalmologist, and opened an 11-bed clinic in Madurai, India with two other ophthalmologists. Dr. V. was frustrated that existing procedures could not clear India’s backlog of 20 million blind. The “aha” moment came for Dr V. while passing a McDonalds on a trip to the United States. Amazed that McDonalds could serve millions of hamburgers daily, at low cost and with uniform quality, he wanted to learn whether a standardized approach could be used to remove cataracts, the leading cause of blindness in India. After visiting Hamburger University in Oak Brook, Illinois, Dr. V. refined an assembly-line model of screening, preparing and operating on patients, that allowed staff at his Aravind Clinic to conduct nearly ten times as many operations per year compared to doctors in the state-owned hospitals.

4. We should have this at home (but we don’t). In the early 1990s, a Swedish business student tried to store his belongings, but found that all the local self-storage facilities were full. Surprised by the demand for a

Faced with a complex and dynamic world, we rely on simplified mental maps to focus attention and guide our action. A start-up business plan, large company’s strategy, and a general’s battle plan are all examples of the mental maps that guide action in a turbulent world. Unfortunately, people often mistake their map for the underlying terrain, and ignore anomalies, or unexpected events that defy their assumptions.

That is a shame. These gaps between our mental maps and reality often point to new opportunities to create economic value. Instead of ignoring or dismissing them, we should actively explore them to see if they reveal an unexpected opportunity. The most welcome anomaly occurs when a product or service exceeds all expectations. When Honda entered the US motorcycle market they expected to sell large motorcycles to leather clad bikers. It was not until a mechanical failure forced them to recall their large models that they aggressively marketed their 50cc bike, which took off in defiance of their ingoing assumptions.

Surprisingly, firms often fail to exploit unexpected success. A few years ago, a London shopkeeper began selling American donuts, which were among his best-selling and most profitable items. A few months later, he eliminated the donuts, because they sold out so fast that afternoon commuters complained when they couldn’t get one. This post and the next will list ten anomalies that often reveal new opportunities.

10. There should be a product here (but there isn’t). As accessories editor for Mademoiselle magazine in the early 1990s, Kate Brosnahan spotted a gap in the handbag market between functional bags that lacked

In 1964, the Metropolitan-Dade county government completed construction of a new Miami port that accelerated the growth of the nascent Caribbean cruise industry. Throughout the next fifteen years, dozens of start-ups, including Royal Caribbean and Carnival, retrofitted existing ships to offer pleasure cruises. Established transatlantic cruise companies, such as Hamburg America Line and the White Star Line, which transported tens of millions of immigrants from Europe to the United States in the late 19th century, failed to seize the opportunity.

Incumbent cruise lines had every incentive to exploit the new market. The rise of non-stop commercial flights between Europe and North America decimated demand for transatlantic passenger cruises, produced massive overcapacity, and wiped out industry profits. They also knew about the market. For decades, European passenger lines had sailed overnight cruises to Caribbean ports with departures from Miami as a way to utilize their ships during the Winter, when rough waters limited Atlantic crossings.

Managers and entrepreneurs walk past lucrative opportunities all the time, and later kick themselves when

In their 1982 bestseller, In Search of Excellence, Tom Peters and Robert H. Waterman, Jr. listed eight themes that explained, in their estimation, the success of the companies they studied. A few of their principles, including “stick to the knitting” and “stay close to the customer” entered business parlance, and one–maintain “a bias for action”–entrenched itself as a fundamental dogma of management practice.

Like all dogmas, “bias for action” captures an important truth. Peters and Waterman defined the principle as a tendency toward speedy decision making–”getting on with it,” rather than getting bogged down in endless meetings. Their exhortation to accelerate decision making provided a much needed fillip to the excessive bureaucracy that slowed action in many large corporations in the early 1980s.

In volatile markets, however, executives often use a bias for action as an excuse to skip the hard work of assessing a messy situation. In an earlier post, I argued that navigating turbulent

Geography shapes destiny. Bordered by oceans to the East and West, the United States has tended towards isolationism through much of its history, while Poland’s position between Germany and Russia has invited invasion from both. Geography, or more specifically the physical layout of organizations, also shapes employees’ ability to make sense of turbulent markets.

The topography of most large organizations-where finance occupies one floor, for example, and marketing another-reinforces the functional fiefdoms that arise naturally among colleagues who read the same professional journals, speak the same jargon, and crunch the same numbers. Geographic dispersion of operations often frustrates executives attempts to foster a shared world-view.

An open office, in contrast, can foster and maintain shared situation awareness among team members. Some of the most agile organizations I have studied, including Zara, Mars, and AmBev rely heavily on open offices, which confer several advantages:

Frequent discussions, overheard snippets of conversation, and visual observation of who is working on what help employees intuit the overall situation and understand how their own work fits into the bigger

Business leaders are often pictured as captains of industry, standing at the bow of a ship, peering through a telescope deep into the clear horizon of the future, plotting a course, and proceeding steady as she goes.

Turbulence, however, obscures visibility into the future, and frustrates long term prediction. Volatility precludes smooth extrapolation of past trends, complex interactions frustrate efforts to anticipate possible outcomes, competitors thwart the best laid plans, and new information emerges that forces a fundamental rethink of a situation.

In turbulent markets, we glimpse the future not through a telescope, but through a kaleidoscope. Leaders making sense of volatile situations must anticipate emerging opportunities and threats in real time; glimpse fresh connections among apparently unconnected events; sift the few key variables from the deluge of trivial; and make sense of the situation based on fragments of incomplete and oftentimes conflicting information. And, of course, all of this must be done in real time often under pressure. And people often seek out historical patterns in new situations.

At first glance, making sense of a rapidly changing environment seems impossibly complex. And yet, entrepreneurs and executives do so on a daily basis, and some achieve consistently superior results. Experts in the aviation industry use the term “situation awareness” to describe a pilot’s or air traffic controller’s

Entrepreneurs and managers can consciously design experiments to surface flaws in their business plan and spur revision. An entrepreneurial experiment, as I use the term, is a test designed to reduce uncertainty critical to success before committing additional resources. Common examples include customer research, prototypes, regional service, and beta customers. Based on the results of these experiments, entrepreneurs may decide to cut their losses, revise their working hypothesis and run another experiment, or harvest the value they have created. Below are some examples.

Identify the deal killers. Every plan includes countless assumptions. Rather than worrying about all of them, an entrepreneur should identify potential deal killers, variables that could prove fatal. Deal killers vary: In commercial real estate development, title disputes or environmental liabilities could scotch a deal, while a software start-up faces a deal-killer if a deep-pocketed rival has a valid claim on the underlying intellectual property. Deal killers are often discernible early on, and managers and entrepreneurs should try to surface these critical source of uncertainty early. New deal killers may appear as the venture proceeds, while others prove tractable.

Know what you are betting on. In turbulent markets, multiple variables influence the an opportunity’s

Entrepreneurs can pursue an opportunity much as scientists pursue knowledge–by following a disciplined process of identifying an anomaly in the market, formulating a plan to fill the gap, testing their plan in the real world, and revising their assumptions in light of new information. Menlo Park based ONSET Ventures, a venture capital firm focused on fledgling start-ups, has codified a set of practices that increase the odds that entrepreneurs formulate, test, and revise their working hypothesis in a disciplined fashion.

Since its founding in 1984, ONSET has backed over 100 early stage start-ups, 80% of which have gone on to receive subsequent rounds of financing, a much higher success rate than the average for investments in raw start-ups. When they co-founded ONSET in 1984, Terry Opdendyk and David Kelley (who also founded IDEO) conducted a systematic study of 300 seed stage ventures, with an eye to understanding the factors that influenced their ultimate success or failure. They found that a few factors accounted for most of the variation between successful and failed start-ups, and codified these findings into a set of principles for incubating new ventures.

Simplify the working hypothesis. When selecting potential investments, ONSET partners use a set of

My last post described Karl Popper’s cycle that explains how scientists spot anomalies in existing theory, formulate a working hypothesis, submit it to rigorous testing, then revisit their hypothesis in light of new information. Entrepreneurs, it turns out, can exploit opportunities much like scientists pursue knowledge, by spotting a gap in the market, formulating a business plan to fill that gap, and then running experiments in the market, and revise their plan in light of new information.

Notice a gap in the market. In the first step, the entrepreneur or manager notices an anomaly in the market that may point to a potential opportunity. Typical anomalies include a product that shouldn’t sell but do or customers using a product in an unexpected way. Consider Noodles & Company, a chain of

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.